Capacity Disruptions and Pricing: Evidence from US Airlines

Abstract

We study pricing responses to shocks that diminish firms’ capital stock, by examining implications of the sudden grounding of the fuel-efficient Boeing 737 MAX on US carriers. Using novel fleet and flight data, we find significant variation in pricing responses among carriers based on their pre-grounding MAX utilization rates. Southwest, the most affected carrier, increased average fares by 1.7% ($4) on its MAX-operated routes, which would have risen by 17% ($41) had the MAX been used exclusively. Cost increases from using less fuel-efficient idle capacity do not fully explain these price hikes, and are attributed to tightened capacity constraints. The quarterly increase in carbon emissions due to the use of less fuel-efficient aircraft during the grounding was equivalent to those produced by 104,720 cars.

Keywords: Pricing, Airlines, Fuel Costs, Pass-Through, Capacity, Emissions

JEL Classification: L11, L13, L93